High-frequency trading
Type of trading using highly sophisticated algorithms and very short-term investment horizons / From Wikipedia, the free encyclopedia
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High-frequency trading (HFT) is a type of algorithmic trading in finance characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools.[1][2][3] While there is no single definition of HFT, among its key attributes are highly sophisticated algorithms, co-location, and very short-term investment horizons in trading securities.[4][5][6][7] HFT uses proprietary trading strategies carried out by computers to move in and out of positions in seconds or fractions of a second.[8]
The examples and perspective in this article may not represent a worldwide view of the subject. (October 2020) |
In 2016, HFT on average initiated 10–40% of trading volume in equities, and 10–15% of volume in foreign exchange and commodities.[9] High-frequency traders move in and out of short-term positions at high volumes and high speeds aiming to capture sometimes a fraction of a cent in profit on every trade.[6] HFT firms do not consume significant amounts of capital, accumulate positions or hold their portfolios overnight.[10] As a result, HFT has a potential Sharpe ratio (a measure of reward to risk) tens of times higher than traditional buy-and-hold strategies.[11] High-frequency traders typically compete against other HFTs, rather than long-term investors.[10][12][13] HFT firms make up the low margins with incredibly high volumes of trades, frequently numbering in the millions.
A substantial body of research argues that HFT and electronic trading pose new types of challenges to the financial system.[5][14] Algorithmic and high-frequency traders were both found to have contributed to volatility in the Flash Crash of May 6, 2010, when high-frequency liquidity providers rapidly withdrew from the market.[5][13][14][15][16] Several European countries have proposed curtailing or banning HFT due to concerns about volatility.[17] Other complaints against HFT include the argument that some HFT firms scrape profits from investors when index funds rebalance their portfolios.[18][19][20]